Today will likely prove to be the most eventful of the week.  It has already featured Q2 Japanese GDP, a slew of Chinese data, euro zone industrial output and UK employment and the BOE’s quarterly inflation report.  Still to come are US retail sales and Fed talk. Â
The most important development has been the BOE’s quarterly inflation report.  It has been understood as dovish; driving down short-term interest rates, with implied yield of the March short-sterling futures contract falling 8 bp to 91 bp, the lowest in more than two months.  Sterling has extended its pullback that began on July 15.  It is posting a big outside down day, having initially built on yesterday’s gains only to be sold off hard.  It has approached the $1.67 level, the lowest also since early June.  The next objective is near $1.6630. Â
There were three dovish elements of the report.  First was the cut in 2014 wage growth projects to 1.25% from 2.5%.  Second was the projection it will take three years to eliminate the economic slack.  Previously it has suggested 2-3 years.  Third was shaving of Q3 GDP forecast to 0.7% from 0.9%, recognizing as the market has that the data points to some moderation in activity after a strong H1. Â
This more than offset the as expected 31k decline in the claimant count and the dip in unemployment to 6.4% from 6.5% in  July.  On the other hand, June earnings (reported with an extra month lag) fell 0.2% on 3-month year-over-year.  This is the weakest since H1 09.  Despite the falling in the claimant count and the unemployment rate, wage growth is non-existent.  This is an issue that cuts across the high income economies and is baffling investors and policy makers alike. Â
It is particularly important for the UK and US as they are perceived to most likely to raise interest rates first. The lack of wage growth says something about the slack in the labor market, but it also poses a challenge for sustaining aggregate demand.
